You have an accounting system and good intentions of using it. Now what?
By Bridget McCrea
It’s time to put the numbers to work in your business by taking them off your CFO’s or accountant’s desk and using them to manage project budgets, grow your bottom line and gain competitive advantages.
Call it a new way of thinking, but many of today’s manufacturers are using their financial data and reports to do just that – and more. Getting there isn’t always easy, according to Tom Compere, CPA, manager at Los Angeles-based RBZ, LLP, which works often with small to midsized manufacturers that want to leverage their accounting systems to benefit their businesses.
“Unfortunately, many of the people who are running these firms are skilled in their trades or crafts, but they’re unsophisticated when it comes to finance,” says Compere. Most will hire bookkeepers and/or controllers who know how to balance the books and very little else. The “numbers” and reports are housed in those employees’ computers, and used for little more than creating sales projections and doing quarterly and annual taxes.
What most firms lack, says Compere, is someone who can take those numbers and use them to do strategic planning and growth projections. Someone who can “bring some color” to the numbers with analysis, ratios and other tools that managers and owners can use to, say, manage inventory more effectively or increase cash flow. Compere sees the latter as a key concern for manufacturers, whose profitability is closely tied to how well their inventories and receivables are managed.
“Once they get QuickBooks or another system set up and running,” says Compere, “manufacturers should look at setting up a standard financial reporting practice that delivers the numbers to management, which in turn can more effectively manage business performance.”
Having worked with manufacturers for the past 28 years, Greg Morgan, a partner with accounting firm Mauldin & Jenkins in Atlanta, says even the smallest of companies can benefit from leveraging their financial data into operational decisions and strategies.
“These companies can use their accounting systems for more than just keeping up with the numbers,” says Morgan, who sees bankers driving much of the movement with their demand for solid numbers and performance estimates. “Banks that lend money are looking over their clients’ shoulders, wanting to see some financial information and performance indicators.”
For precasters looking to leverage that financial data for their own use, Compere sees inventory management, sales prediction and receivables as good starting points. “These are the most challenging areas that any manufacturer faces,” says Compere, who cautions companies to ensure that the data housed in their systems is accurate and up to date before taking it to the firm’s other departments. “Make sure you have competent people who are getting the job done,” he adds, “or your efforts to improve performance based on those numbers will certainly fail.”
To ensure that the right team members are on board with the numbers, Compere suggests including the finance department and management ranks in the planning process. Make sure there’s clear communication concerning exactly what’s being done (using a recent accounts receivable report to institute a sales process that expedites payments, for example, or reviewing a recent inventory report to create a more efficient ordering process) within as well as between the various departments.
Company owners should also be involved. They should receive comprehensive financial statements along with collections, receivables, payables, inventory and sales reports.
Don’t overlook the purchasing department, which should be as “plugged in” as possible in terms of inventory and sales monitoring in order to complete their ordering processes.
On a regular basis these various factions should come together at department meetings, where everyone can sit down, pore over the numbers and develop company-wide strategies. At the meetings, Morgan says at least a part of the time should be spent reviewing “scorecards” or “dashboards” that track key items within the company. The precaster who maintains inventory, for example, should be looking closely at inventory turns and benchmarking themselves against other companies in the industry.
Morgan suggests using a combination of QuickBooks and a Microsoft Excel spreadsheet to illustrate formulas that calculate your company’s inventory turns. Use a similar approach to accounts receivable, he says, and keep close tabs on the time between orders and payment. “If that number begins to grow over time, you have a collection issue on your hands,” says Morgan. “Rather than waiting for it to get to that point, figure out what’s important to you now and use financial measures to track the trends over time.”
Measuring the benefits
The precaster who ignores the value of financial data puts the operation in a large category of companies that aren’t taking advantage of a fairly simple-yet-effective business tool that’s already housed in their internal computers. “Finances are more than a necessary evil,” says Morgan. “They’re a tool to manage your business.”
Patrick Rogan, CPA, owner of Patrick C. Rogan CPA in Sacramento, says precasters would gain significant benefits by simply understanding whether their jobs are profitable – or not. Using their accounting systems, companies not only can track the profitability of current jobs, but can also gain insights that will help them bid on future jobs.
“Some companies are so busy that they just keep billing and never know what their cost of doing business is,” says Rogan. “If you don’t analyze the numbers, and if a customer suddenly states that he doesn’t want to spend more than $10,000 on a job that costs that much, then you won’t know that it’s time to walk away from that job.”
To help with such situations, an accounting package from QuickBooks, Peachtree or Microsoft can easily be transformed into a business management tool as long as the data housed in it is both accurate and timely. What for many serves as a vehicle for invoicing customers, receiving payments, inputting invoices and paying bills, for example, can be used to export information into Microsoft Excel files and be presented at management meetings. And if company owners’ eyes glaze over at the thought of reviewing reports, the data can be presented in a graphical format (using Microsoft PowerPoint slides, for example) that gets their attention and “wins them over,” says Morgan.
“Show someone in a linear fashion that the firm’s sales and receivables have increased over the last five years, and they’ll have to figure out the year-over-year ratios in their head,” says Morgan. “Put it on a line or bar graph showing the last five year’s worth of sales and receivables, however, and your presentation will resonate.”
With so few companies running at “peak efficiency” and even fewer employing competent financial professionals, Compere says the precaster who takes the bull by the horns and transforms raw numbers into useful data will quickly move ahead of the pack. “Do this and your business will not only be profitable and have good cash flow, but it will also be positioned to grow,” says Compere. “Then, rather than having to constantly fix problems, you’ll be able to use more consistent, accurate information to make faster business decisions.”
Need a CFO?
As Tom Compere pointed out, the typical manufacturer is hard-pressed to find a competent, affordable CFO to put on its payroll. And while CPAs do “fill in” where needed, particularly when tax time rolls around, there’s still a significant need for experienced professionals who can come in and take over a firm’s accounting department.
Enter the “rent-a-CFO” trend, which finds smaller firms – those that wouldn’t be able to shell out a six-figure salary for a seasoned CFO – retaining controllers on a part-time or contract basis. Usually found by networking with CPAs and accountants in your corner of the world, these professionals learn the ins and outs of your business (if they aren’t already familiar with your industry, which is preferable) and serve as key advisors.
“They may only come in one or two days a week, providing knowledge in accounting and finance that you wouldn’t otherwise be privy to,” says Morgan, who adds that some CPAs may offer similar services to clients. “They may have four or five different clients and are able to spread their time over those various companies.”
The advantage for precasters who take this route, says Morgan, is that they get top-notch service for a price that’s much lower than what they would shell out for a full-time employee with benefits. “There are a lot of part-time CFOs around to choose from,” he says, “so pick one who knows your industry and type of company, and that can work with you to get your financials in order and working in your favor.”
Bridget McCrea is a freelance writer who covers manufacturing, industry and technology. She is the winner of the 2007 Florida Magazine Association’s Gold Award for best trade/technical feature statewide.
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